Project Costs: What’s the Bottom Line?

“How much will this cost?” is one of the first and foremost questions addressed when a capital project is presented for board review and approval. Whether the project in question is mandatory (like a code required fix) or discretionary (like new landscaping or interior finishes), the cost should and will inevitably be a key factor in the decision making.

If one has ever bought a car, one knows that there is always a difference between the initial price and what one pays at the end of the transaction. Though hardly alone in doing so, the automobile industry is notorious for touting the sticker cost or minimum monthly payment in large writing while effectively burying the fine print (taxes, licensing fees, optional items). By the time they are added, along with financing, the cost is unsurprisingly much higher. Such, too, are the costs of capital projects; it can be difficult to assess a total project cost based on the estimate or proposal.

A roof replacement is a good example. First, there are the hard costs: roofing materials themselves and labor associated with their installation. Lumped in with these hard costs are optional extras, like smaller roofs nearby (bulkheads, awnings, etc.) that should be replaced at the same time, or maybe additional insulation or possibly even extras on top like solar panels. Squaring away all the potential add-ons, should leave the cooperative with the base hard costs of the project. It is also necessary to include soft costs in these calculations. Depending on the location and circumstance, there will be further costs for permitting, taxes and insurance.

For the roof replacement, there may be a permit required from the local town or city, taxes on the roofing materials (if not included in the contractor’s price or exempted) and supplemental insurance if the cooperative’s carrier requires it. Oversight can be another tricky soft cost to estimate. Depending on the scale of the project, personnel on behalf of the cooperative will need to be available for coordination and periodic observation to confirm that the project is completed correctly. This person can be a volunteer board member or a member of the cooperative management team; just remember that the cost of involvement in a larger scale project may not be included in the management team services.

Additionally, depending on the project, neither the board member nor management team may be technically proficient enough to observe the project properly, in which case an outside professional (like an architect/engineer) may be needed. Last, but not least, once all the soft costs have been added, there must be contingency allowances. A certain percentage of between 5 and 15 percent varying by project should be added and set aside in case of unforeseen problems that may arise. If one has ever seen one of the popular home improvement shows on cable where people renovate or flip houses, one knows something always goes wrong: unexpected damage that was previously concealed; unexpected delays due to weather; a surprise potentially hazardous material (like mold or asbestos) that needs to be tested and abated. As with the roof example, one could come across all three: structural beams that were damaged and now need to be repaired, a delay due to rain or snow, older roofing materials that contained asbestos at some point in time and may need to be tested and/ or abated.

At the end of the day, the project’s soft cost combined can add up to the cost of the base project itself. This scenario may sound crazy, but it is true. The consumer company, SoFi Lending Corp.*, had an advertisement placed in the Black Friday shopping circulars of several newspapers; it was designed to look like a normal advertisement for holiday shopping from a department store, but it featured a teddy bear for $87.56, a waffle iron for $182.67 and blender for $1,458.71. Its point was that with bad financing from high interest credit cards, one pays much more than one realizes for consumer goods. The same holds true for capital projects: a base proposal from a contractor may come at one price, but the true cost will undoubtedly be higher.

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